Wills and Trusts

WHAT DO YOU NEED TO KNOW ABOUT WILLS, TRUSTS, ESTATE TAX PLANNING, LIVING WILLS, HEALTH CARE SURROGATES, AND DURABLE POWERS OF ATTORNEY?

I. DO YOU NEED A WILL OR TRUST?

Every adult who owns property, might own property in the future, or may have legal rights to property at the time of their death, should at least have a simple will. There are many factors to consider in determining whether a will or trust should be utilized. In addition, proper planning includes other ways to transfer property at the time of one’s death. These should be considered in conjunction with, and not as a replacement for, a will or trust.

A. JOINTLY HELD PROPERTY. All sorts of assets (land and buildings, cash, investments, motor vehicles, etc.) can be owned jointly with other people, such as your spouse or children. There are three common types of joint ownership:

1. Types of Joint Ownership:

Joint Tenants with Rights of Survivorship: Property owned by joint tenants with rights of survivorship (JTROS) automatically passes to the surviving joint owner upon the death of one of the joint tenants. Special language is required in a deed, title, account agreement, or other ownership document to create this type of ownership. Only a licensed attorney should prepare a deed to change ownership.

Tenants in Common: Tenants in common are individuals who are not married. Each owns a portion of the asset. The share of each tenant in common does not pass to the survivor and, instead, passes to the heirs of the tenant who passed away.

Tenants by the Entireties: When a husband and wife acquire ownership of an asset, their ownership is described as tenants by the entireties. They must remain married while they own the asset, and ownership will pass to the surviving spouse. If the couple divorces, even if they remarry, the owners become tenants in common, destroying the survivorship rights.

An attorney should be consulted about ownership options if you are purchasing real estate and a non-lawyer title company is handling the closing, or if you considering a change to the ownership of real property.

2. Risks and Benefits of Joint Ownership. There are many risks and disadvantages to joint ownership.

Creditor Claims: Your assets will be exposed to the other joint owner’s liability for liens placed against them. Joint ownership with rights of survivorship between you and your spouse helps to avoid liability to creditors when only one spouse is obligated to the creditor. Joint ownership with other persons often exposes all or part of the jointly owned asset to the lien of anyone who obtains a judgment against the other joint tenant. This is true whether the judgment is due to negligence, such as in causing a serious traffic accident, or for failure to pay debts, to pay taxes, or to perform contractual obligations.

Tax Consequences: By making someone a joint owner with you, you could be subject to federal gift taxes; state documentary stamp taxes on the deed; higher capital gains taxes for the surviving joint owner; higher property taxes through loss of the homestead exemption and the Amendment 10 Cap, and higher estate taxes.

Loss of Control: In many cases, joint ownership means that all joint owners must agree and sign documents to sell or mortgage property. If one of the joint owners dies, becomes incapacitated, divorces, moves, or just disagrees, the remaining owners have a problem. In other cases, such as with bank accounts, one of the joint owners could withdraw the funds without the consent of the other owners.

Eligibility for Public Assistance: While many believe that it is advisable to transfer assets to family members in order to qualify for public assistance, even the transfer of a partial interest in an asset could result in disqualification. Planning for public assistance eligibility can, in some cases, include the re-titling of assets, but should only be done with the advice of a licensed attorney.

Inability to Plan for Untimely Deaths: Joint ownership does not allow you to plan for the untimely death of one owner, such as the death of a child before a parent. Also, joint ownership requires additional planning for the passing of ownership after the last joint owner passes away.

Unexpected Consequences of Divorce: Tenants by the entireties ownership between a husband and wife is converted to tenants in common ownership upon their divorce. This destroys the survivorship feature of tenants by the entireties ownership. If nothing more is done, and the husband dies after remarrying, it is possible that the first wife and second wife become joint owners. Florida’s constitutional protections for the family could result in the former spouse, the surviving spouse, and the decedent’s minor children all having an ownership interest.

Second Marriages: Florida law provides strong protections for a surviving spouse, even if it is a second, third, or fourth marriage. These protections can interfere with the goal of leaving assets to the children from a prior marriage. Without careful planning, the children of the first spouse to die could see all of their parent’s assets pass to the children of their stepparent as a result of these protections and the failure to consider the effects of joint ownership.

Trusting One Child to Share: Making one of your children a joint owner to avoid probate makes several dangerous assumptions. The arrangement only works if your child survives you, never has any financial problems, never divorces, never has any type of accident resulting in a judgment, and the child is willing to share the assets after you pass away. We have seen many instances where the child finds a justification for not sharing. They have no legal obligation to do so, and may face tax problems if they do share. They are under no legal obligation to carry out your wishes.

B. DESIGNATION OF BENEFICIARIES. Some assets such as life insurance, pensions, IRAs (Individual Retirement Accounts), 401K plans, and certain "ITF" ("In Trust For"), and "FBO" ("For Benefit Of") bank accounts, allow you to designate beneficiaries. If set up properly, these assets will be transferred upon your death without the need for a will, trust, or probate, at least for that particular asset. These beneficiary designations, however, cannot be as detailed or cover as many scenarios upon your death as a will or trust. For example, if you list two beneficiaries, what would you want if one of the two beneficiaries predeceased you leaving children? You might want to leave the deceased beneficiary's share to the other surviving beneficiary or to the deceased beneficiary's children. Sometimes, it is better to make your beneficiary for these assets your estate (controlled by your will) or your trust, and then allow these documents to direct who should receive the assets. However, retirement accounts require special attention due to income tax laws, and you should be aware that directing the distribution of the account through your estate or trust may result in additional income tax for the beneficiaries. Therefore, careful coordination between your attorney, your tax advisor, and your financial advisor should be considered. In all cases, written confirmation of the beneficiary designations should be obtained and kept with your other planning documents.

C. GIFTING. Gifting is a way to avoid the need for a will, trust, or probate for the assets given. To be completely successful with this strategy, you would have to know when you are going to pass away and then give all your assets away prior to your death. Obviously, this has many serious drawbacks. It is difficult to predict a when your death will occur and no one should give away all of their worldly possessions prematurely. By making a gift, you may also be exposed to liability for gift taxes, documentary stamp taxes for real property, and the loss of valuable property tax exemptions. The person receiving the gift may face higher capital gains taxes when they sell. Perhaps most importantly, you lose control of assets that may be needed for your care and support, and may lose eligibility for government assistance programs.

D. INTESTATE LAWS. If a Florida resident dies without a will, trust, or beneficiary designations on his or her assets, the state has decided how his or her property will pass. Typically, the intestate laws transfer the deceased persons’ property to his or her closest relatives such as the spouse and children, or, if there are none, to the next closest relatives, then to the most distant of relatives, and then to in-laws, until someone qualifies as the closest heir or heirs. If a deceased person has absolutely no living relatives and their last spouse had no living relatives, only then does his or her estate go to the State of Florida. This is extremely rare, even for people who do not have a will. A will or trust allows you to choose who will receive your assets, who will handle the distribution, and when the distribution will occur.

E. CREDITOR CLAIMS AT DEATH. Despite the perception that the probate process is slow, the probate process actually provides a procedure to expedite the settlement of creditor claims. With proper notice to known creditors and a published notice for unknown creditors, most creditors will be forced to file a claim within 3 months or lose the ability to enforce the claim. Without probate, most creditors have up to two years to bring a claim. Because this process is not available for trusts, probate actually resolves creditor claims quicker than a trust. The probate process also allows certain assets to be set aside as exempt from creditor claims based upon the protections for the spouse and family members of the decedent. For example, a Florida resident’s home, car, and household furnishings passing to the decedent’s children could be completely protected from creditor claims.

F. CONCLUSION. Given the above-described disadvantages and limitations of the various alternatives to wills and trusts, a will or trust is an important part of your plan. A will or trust is also important to handle matters other than the basic distribution of assets, such as the designation of guardians to raise minor children, the creation of trusts to delay the distribution of large inheritances to minors or immature young adults, or saving estate taxes. In some situations, however, a will or trust may not be the best or only solution. Therefore, it is important to see the appropriate legal, tax, and financial advisors for a complete review of your plan.

II. WILLS VS. TRUSTS.

A. WHAT IS A WILL? A basic will is a written document signed by a person (the "testator" or "testatrix") in the presence of two witnesses (and usually a notary public). The will first directs the payment of debts, taxes, and estate expenses. Next, the will directs how and to whom the assets owned at the time of death are to be distributed. The will also designates a person or persons to serve as the personal representative (formerly known as the "executor") to carry out the terms of the will. This process is supervised by the probate court. In a will, the testator or testatrix can bequeath or devise property by describing the specific items, using specific dollar amounts, or using percentages or fractions of the residuary estate, which is all of the remaining property after payment of debts, expenses, taxes and the specific bequests or devises. The will can also give funeral, burial, and/or cremation instructions; create trusts and appoint trustees; and nominate guardians for minor children.

B. WHAT IS A TRUST? A trust is an agreement between a settlor and a trustee. The person creating the trust is referred to as the settlor. The settlor agrees to give and entrust a certain asset or assets to a trustee, who can be an individual or a trust company. The trustee agrees to hold and distribute the asset or assets, and the income generated, to the trust's beneficiaries as set forth in the trust agreement. In a “living trust”, sometimes referred to as a “revocable trust”, the settlor also serves as trustee until the he or she passes away, becomes incapacitated, or resigns. At that point, the person designated as the successor trustee can handle the settlor's assets held by the trust. A husband and wife can serve together as co-trustees. The settlor continues to control and manage his or her assets within the trust just as the settlor did prior to creating the trust. Upon the death of the settlor or settlors, the trust distributes the property in the trust in the same way as a will, but without the need for probate.

C. HOW ARE WILLS AND TRUSTS SIMILAR? A will and revocable trust are similar in the following respects:

1. Asset Distribution. You can use either a will or a trust to distribute your property upon death.

2. Assets Controlled. A will controls only property that is in your name alone. A trust controls only those assets which have been transferred to the trust. Neither wills nor trusts control property held or owned with another as tenants by the entireties or as joint tenants with rights of survivorship. Neither wills nor trusts control property with a beneficiary designation unless the estate or the trust is the designated beneficiary.

3. Successors Upon Death. Both a will and a trust designate a successor to handle assets after your death. A will designates a personal representative to manage the estate. A trust designates a successor trustee to manage the trust assets. Both personal representatives and successor trustees handle your property and financial affairs upon your death by paying your last debts and expenses and then distributing the remaining assets to your beneficiaries. Both types of successors follow the plan in the will or trust and are “fiduciaries” because they are trusted to act in the best interests of the beneficiaries. Both have a duty to act in the interests of the beneficiaries named in the will or trust.

4. Estate Tax Savings. Strategies to achieve estate tax savings can be incorporated in both wills and trusts. The same tax-saving concepts apply to both instruments. However, trusts avoid the need to probate the assets within the trust. A properly drafted trust may offer opportunities for income tax savings on certain assets that are not available for assets passing through an estate.

5. Terminable and Amendable. Both wills and trusts can be terminated or amended at any time, but must be signed in the presence of two witnesses. The person signing the will or trust must be competent and free from undue influence.

D. WHAT ARE THE DIFFERENCES, ADVANTAGES, & DISADVANTAGES BETWEEN WILLS AND TRUSTS? The differences between wills and trusts create various advantages and disadvantages. Some of the differences are as follows:

1. Date Effective. A will becomes effective and operational only after you die. A living or revocable trust becomes effective immediately upon execution. Therefore, you should begin handling your affairs through your trust immediately after signing. After executing a trust, you need to “fund” the trust by transferring some or all of your assets into the trust. If assets are not transferred to the trust, probate will be required unless the asset allows for beneficiary designations. There are, however, some assets which should not be transferred to the trust in some situations, including Florida homestead real estate.

2. Cost. Probate is the court process used to determine that will is valid, to appoint a personal representative, and supervise the payment of debts and distribution of the decedent’s property. If there is no will or trust, the probate process also establishes the identity of the heirs according to Florida law. If you have a trust with all of your assets within the trust, probate is avoided. Probate is required for assets that “don’t take care of themselves,” meaning that they are not in a trust, do not have a beneficiary designation, and are not subject to a form of ownership with survivorship rights. Some of the more typical costs for the administration of trusts and wills include:

· Fiduciary Fees. Trusts generally offer lower fiduciary fees. A personal representative managing an estate is usually entitled to a fee of 3% of the probate assets. Trusts still have costs of administration, and trustees are entitled to compensation, but the fees are usually about 25% lower. These costs are based upon the responsibility a trustee undertakes in administering a trust, the liability faced by a trustee in handling the trust assets, and the time required to handle the trust as required by Florida law.

· Attorney Fees. The personal representative must be represented by an attorney unless the personal representative is the only estate beneficiary. The Florida Statutes provide a guideline for the probate attorney fees at roughly 3% of the assets passing through probate. For example, if a probate estate includes $500,000.00 in assets, the attorney's fees to probate the estate would generally be $15,000.00. For a trust administration, these presumed fees are reduced by 25%. Given the amount of work and responsibility involved in advising a trustee or personal representative, many experienced attorneys follow these guidelines because they provide a way to let the trustee or personal representative, and the beneficiaries, know in advance, what it will cost to do the job properly.

· Expenses. The expenses for a probate administration in Florida generally run around $750.00, including court costs, certified mail costs, the premium for a probate bond, and publication costs. These costs can be avoided with the use of a trust. Other expenses, such as fees for tax and legal advisors, are required for trusts or probate.

· Delay. An estate in which no federal estate taxes are due typically takes six months to a year to probate. An estate in which estate taxes are due typically takes two years to probate due to the time it prepare and file the estate tax return and for the IRS to process the return. Absent any special provisions in the trust itself, a trust could be administered more quickly, but this comes at some risk to the trustee because creditors have up to 2 years to file a claim against the decedent’s estate if the probate process is not used to settle the claims of creditors. Sometimes a trust may include terms that delay complete distribution, such as protection for shares passing to minor children. There may also be reasons for the trustee to delay distribution, including unresolved creditor claims, disputes among the beneficiaries, or the need to liquidate trust assets. The court’s supervision of the estate administration is not always the factor that causes delay, so there is no guarantee that a trust will be administered more quickly than a will. In some cases, it may actually be slower.

3. Planning Costs. A basic, simple will is the least expensive option to prepare. A basic living or revocable trust can cost much more, especially when estate tax planning is included. In the short term, wills are less expensive than trusts. In the end, however, trusts can be less expensive to administer than wills when all of the costs are considered.

4. Time and Effort. When you sign a will rather than a trust, you have completed your estate planning for the assets covered by the will. From that point on, all assets in your name alone (without beneficiary designations) are controlled and distributed by your will. On the other hand, when you execute a trust you must still “fund” the trust by transferring assets into the trust. Assets purchased or sold in the future must also be handled under the name of the trust. If one significant asset is left out of the trust, then that asset will have to go through probate. Therefore, trusts take more time and effort to establish and require that you properly and continuously maintain your assets in the name of the trust. The cost and time savings with a trust come after you becomes incapacitated or pass away.

5. Privacy. Trusts are more private than wills.

· Wills. The will and most of the documents in the probate file are available to the public. The Inventory and Accountings are confidential and not available to the public, and the Florida Supreme Court is currently enacting rules to keep more information in court files private. The will is usually recorded in the land records after it has been admitted to probate.

· Trusts. Florida, unlike some states, does not require that a trust be filed with the court or registered. In some cases, it might be necessary to file certain information about the trust in the public land records. There is also a document that must be filed with the court when the settlor of a revocable trust dies, listing the settlor’s name, the name of the trust, the trustee’s name, and the trustee’s address. Therefore, the trust agreement, the identity of the trust beneficiaries, and the amounts distributed to the beneficiaries are less likely to be available to the public, but some information will become public.

6. Court Supervision. Despite the cost, time and effort involved in the probate process, you can take comfort in the fact that your personal representative and the estate attorney are under the supervision of the probate court. In avoiding probate by using a trust, you give up the security of court supervision. Therefore, you must absolutely trust the person or entity that succeeds you as successor trustee. A successor trustee only comes under court supervision if one of the beneficiaries becomes dissatisfied, retains legal counsel and initiates a lawsuit against the successor trustee. An irresponsible trustee who does not seek professional advice in carrying out his or her duties can actually cost the beneficiaries more than the extra costs associated with the probate process.

7. Avoiding Probate and Trust Litigation. A growing trend in Florida law is litigation over wills and trusts. In some cases, there are legitimate reasons to challenge the validity of a will or trust. In many cases, the beneficiaries just don’t like what the will or trust says, or believe that something else was intended. To challenge a will or trust, there must be evidence of a mistake in drafting the will, undue influence, incapacity, or fraud. Because a trust does not require court supervision, some view a trust as being less prone to litigation than a will. Unfortunately, large estates are prone to litigation, so careful planning is crucial. Some tips for preventing litigation in your estate include:

· See your attorney regularly, at least every two years, if not yearly. Be alert to the need to review your plan when there is a birth, death, marriage, divorce, or other change in your family. Monitor the values of your assets and the types of assets you own. Ask your attorney about changes in the law that might affect your plan.

· Be open with your attorney and provide the information needed to get the best advice possible and ask questions about anything you don’t understand.

· Don’t rely on web sites, newspaper articles, do-it-yourself software, or persons who are not attorneys, but attempt to offer what is really legal advice. Florida law has many complex areas that are prone to litigation, including the ownership of homestead real property, second marriages, and the duties imposed upon trustees and personal representatives.

· The price of professional planning and document preparation is money well spent considering the cost of litigation, which can easily reach six figures.

· Meet with your attorney alone, to make sure that all of your discussions about what you want are free from the influence of others. Tell your attorney if you feel that you are being pressured.

· Make sure your documents are properly executed by meeting with an experienced attorney with experienced staff who can serve as witnesses when you sign.

· Don’t discuss your plan with your intended beneficiaries because their expectations may not match the plan in your final planning documents.

III. ESTATE TAX PLANNING

A. WHAT IS THE ESTATE TAX? The estate tax is the federal tax applied to the value of the decedent’s assets exceeding the “estate tax exclusion amount.” The tax rate in 2009 ranged from a minimum of 18% to a maximum of 45%. On December 17, 2010, President Obama signed legislation that prevented the rates from increasing as previously scheduled for 2011 and 2012, with the highest rates now set at 35% and the exemption at $5.0 million. The rates are scheduled to increase in 2013 and the exemption will be reduced to $1.0 unless Congress takes further action.

The estate tax is far more substantial than the income tax because it requires your trustee or personal representative to pay a tax equal to a percentage of your assets, which is usually more than a percentage of your income.

Florida currently has no estate tax, but assets located in other states might be subject to that state’s estate tax. If you own property in two or more states, you should obtain legal and tax advice in each state. Florida’s estate tax could be reinstated in 2013, depending upon whether federal law in effect at that time allows a deduction or a credit for state estate taxes. If reinstated, Florida’s estate tax would equal the maximum credit against federal taxes, so the total tax paid does not change.

Given the constant change in this area of law, regular communication with your tax advisor and your attorney is crucial.

B. WHAT IS ESTATE TAX PLANNING? Estate tax planning uses asset re-titling, gifting, family business entities, and the creation of revocable and irrevocable trusts to transfer ownership and control of your assets before and after death. One goal of the plan is to avoid the payment of unnecessary estate taxes. Another important objective is to retain as much of the income and control of your assets as possible. Often, the two goals conflict. We work closely with each of our clients to achieve the desired balance between tax planning and control of assets during the client’s lifetime and after their death. Ultimately, it is your choice to determine the balance between your personal objectives and tax planning.

C. HOW DO I KNOW IF I NEED ESTATE TAX PLANNING? If the value of the assets owned by you or you and your spouse exceed the current estate tax "Unified Credit Exemption Equivalent" amount, you need estate tax planning because every dollar of assets over this amount, after deducting estate expenses, debts and charitable gifts, is going to be subject to estate tax. For 2011 and 2012, current law makes this exemption “portable” allowing the surviving spouse to use the amount of the first spouse’s exemption that was not utilized. This means that a married couple who both die while the current exemptions and the portability feature are in effect could leave as much as $10 million to their children free of estate tax. The exemption amount and the portability feature are subject to change, so regular reviews of your asset values, the way your assets are titled, and the terms of your planning documents are required.

IV. LIVING WILLS. A living will is not a will at all. Rather, it is an expression of your desire to die naturally if you are suffering from an incurable condition, in a vegetative state, or severely, irreversibly incapacitated and unable to express your wishes personally to your physician. Therefore, we do not make recommendations for or against living wills. This is your personal choice. If, however, you agree with the declarations in a living will, they are beneficial because they save your loved ones the financial and emotional costs of maintaining you on life support. Perhaps most importantly, a written living will gives comfort to your loved ones that your wishes are being honored and respected. Once your doctors have determined that nothing further can be done to improve your medical condition, carrying out one of your last wishes is a final act of care in the midst of the sorrow that naturally surrounds such a difficult time.

V. HEALTH CARE SURROGATE DESIGNATION. A Health Care Surrogate Designation may be used to appoint a health care surrogate (typically, a spouse, close relative or other loved one) to make medical decisions for you if you are unable to do so, whether you are dying or not. You still retain control over your medical care and the surrogate only acts when you are not able.

VI. DURABLE POWERS OF ATTORNEY. A durable power of attorney is a general power of attorney which continues despite your incompetency. This powerful document is used to give someone the power to handle all of your financial affairs if you are unable to do so. A durable power of attorney avoids the need for guardianship proceedings, which are costly in terms of emotion, time, and attorney's fees. The durable power of attorney confers broad, complete, and extensive powers to its holder, the attorney in fact. These powers are conferred as soon as the durable power of attorney is executed and delivered to the attorney in fact. Unlike a court-appointed guardian, an attorney in fact is not under the supervision of a court. Therefore, you must absolutely trust the person to whom you give a durable power of attorney. We have seen many misunderstandings arise from the use of a power of attorney. We recommend that the power of attorney only be delivered upon your incapacity. For long-term situations, a trust should be considered as the primary tool to manage assets during incapacity, with the power of attorney as a backup for assets outside the trust. It should also be noted that a power of attorney may not give control over assets subject to a trust.

VI. CONCLUSION. This has been a very general discussion intended to encourage active planning under the guidance of a qualified attorney, and, in some cases, the joint efforts of an attorney, accountant, insurance professionals, and financial planners. It is not intended to constitute legal advice and cannot be relied upon for that purpose. Every individual has unique circumstances and desires which require specialized planning. The planning described in this discussion is not a “do-it-yourself project”. Even “estate-planning software” offered on television or at office supply stores cannot replace the interaction between an experienced attorney and a client or the interaction between the client and other estate planning professionals. For further information on what you need to know about wills, trusts, estate tax planning, living wills, health care surrogates and durable powers of attorney, please contact Jeffrey S. Goethe at Barnes Walker, Goethe, & Hoonhout, Chartered, 3119 Manatee Avenue West, Bradenton, Florida, 34205. Telephone: 941-741-8224. Email: jgoethe@barneswalker.com

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